Risk sentiment took another massive hit on the final trading day of May, as US President Donald Trump tweeted about imposing a five percent tariff on all Mexican goods entering the US beginning June 10. The move is aimed at stopping illegal immigration, and the tariff rate could be raised to 25 percent by October 1, unless Trump deems illegal immigration has been “remedied”.
Markets were left reeling from the announcement that came out of the blue, with the Mexican Peso immediately slumping by over two percent against the US Dollar before paring declines, while Asian stocks and currencies extended their drop for the month. Safe haven assets are gaining at the time of writing. As Gold rallied past the $1,290 level, the Japanese Yen strengthened below the 109 level against the US Dollar, and 10-year US Treasury yields fell further below the 2.20 mark.
Markets in May roiled by Trump’s unpredictability
Trump’s apparent trigger-happy ways in imposing tariffs on major trade partners have roiled markets throughout the month of May, severely dampening hopes of a global economic rebound this year. Given Trump’s overt displays of tremendous unpredictability, investors are left with little choice but to adhere to the risk aversion theme, as the US-led trade tensions risk opening up on new fronts and spilling over into sectors beyond trade.
Such heightened uncertainties set markets up for a jittery June, barring a major turnaround in the US administration’s trade stance in the near-term. In the interim, markets will be desperately scanning the horizon for any signs of relief over the coming months, even as they prepare for the likelier scenario of protracted uncertainty that risks becoming a bigger drag on global growth.
Trump’s latest tariff shot to keep risk aversion in play
Following Trump's latest tariff salvo, emerging-market assets are exposed to potential contagion effects via the sentiment channel, as seen in Friday's early morning declines for the South African Rand and Turkish Lira, after the slump in the Mexican Peso. The indication of further risk aversion heading the way of financial markets also means that generally risky assets, including emerging markets and Asian currencies belonging to developing nations will fall by the wayside and fail to be picked up along the way by investors as they intensify their flight to safety.
The yen, Gold, US Dollar are the main assets that are favoured during market uncertainty.
Dollar’s charge towards new 2019 high on pause
The Dollar’s charge towards a new 2019 high has fizzled somewhat, as the 98.3 mark appears one-step too far for the US Dollar Index (DXY) for now. However, a US non-farm payroll sprint that exceeds market expectations in the week ahead could just be the catalyst required to send the DXY higher, even as the Greenback remains supported by a resilient US economy.
However, the US economic outlook does stand to face headwinds as the global economy suffers through the effects of US-imposed tariffs. Should downside risks become highlighted, the Fed may just have to succumb to market expectations and lower US interest rates, with the Fed funds futures currently pointing to a near-70 percent chance of a rate cut by September.
Oil set to register first monthly loss of 2019 amid flare-up in demand-side uncertainties
Oil is set to widen its first monthly loss of 2019, as Brent futures tumbled towards the $66/bbl mark. Oil’s declines were fuelled by Trump’s newly-announced tariffs on Mexico, as well as concerns over rising US gasoline stockpiles which suggest weakening demand.
Such market dynamics will frame the upcoming OPEC meeting in June as a pivotal event that will shape Oil’s outlook for the rest of the year. Even the decision by OPEC+ producers to extend their supply cuts campaign into the second half of 2019 may not be enough to fully support Oil prices, should global demand deteriorate further.
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